Conventional and Unconventional monetary policy: A comparative analysis
Definition
The definition of conventional and non-conventional monetary policy will be explained
by first understanding what monetary policy is and then by differentiating the
conventional and unconventional policies by using examples. Monetary policy is how
central banks manage the money supply in a country to achieve their goals. (Monetary
Policy, 2022). In South Africa this is done through inflation targeting which is the
process of adjusting interest rates to accelerate or slow down economic growth in the
country by having inflation grow at a range between 3% and 6% (Monetary Policy,
2022). In Australia, an inflation rate target which ranges between 2% and 3% is used
to protect the value of money and incentivise sustainable economic growth. (Monetary
Policy, 2022) Monetary policy includes conventional tools in which to achieves their
goal. This can be done through open market operations, reserve requirements and
repurchase rate adjustments.
Open market operations are a process whereby the central bank purchases or sells
government bonds to 1) Increase commercial bank reserves (2) Increase the price of
bonds which lowers the interest rate and 3) Decrease interest rates in general to
incentivise spending and investment. (Monetary policy | Definition, Types, Examples,
& Facts, 2022)
Reserve requirements are statutory requirements that are used as a monetary policy
instrument. It enforces commercial banks to hold a percentage of their liabilities in
cash reserves if there are large changes in domestic volatility. (Van Der Merwe, 2022).
In South Africa
Advantages and Disadvantages of each and use countries
How does it the different policy approaches affect price stability
How does it affect financial stability?
How does it affect economic growth?